Archive for October 2017


Trick or treat?

Suppose that 6 months ago you had told some progressive pundits like Matt Yglesias that the GOP tax plan would keep the top income tax rate unchanged, in other words, they would endorse Barack Obama’s decision to raise the top rate from 35% under Bush (and 39.6% under Clinton) up to 43.4%.  They would probably have assumed that you were crazy.  And yet according to the AP, that’s exactly what’s about to happen:

Although they had settled on some key details — such as a cut in the corporate tax rate to 20 percent and maintaining the top personal income tax rate for the wealthy of 39.6 percent — other elements still had to be resolved, including the income levels for the tax brackets.

[As usual the media gets it wrong, the top rate is 43.4%, not 39.6%—as there are two federal income taxes, and the rich must pay both of them.]

Yes, the top corporate rate will be cut, but even the Dems favored that move.

Elections have consequences.  Elect a libertarian President and Congress, and see Obamacare repealed and the top income tax rate cut.  On the other hand if you vote for the Dems or the GOP then Obamacare stays in place and the top rate stays at 43.4%.  So yes, it does make a difference who you vote for.

Remember how the supply-siders got all excited when Trump proposed a 25% top rate?  And remember what I predicted?


I don’t buy the Economist for investment tips

I view The Economist as the best magazine in the world, which is why I like to pick on them so much.  I recently came across a couple examples of faith-based reasoning at the Economist.  Here’s a piece on the recent recovery in Japan:

JAPAN’S economy has been so sickly for so long that many have stopped looking for signs of recovery. And yet, on close examination, they are there. Years of massive fiscal and monetary stimulus seem to be having some effect. Unemployment is below 3%—the lowest rate in 23 years—and wages are rising, at least for casual workers. Prices are creeping up, too, albeit by much less than the Bank of Japan’s 2% inflation target.

Yikes!  Massive fiscal stimulus?  In fact, Abenomics has involved a sharp contraction in fiscal policy, mostly due to a large increase in their national sales tax.  Budget deficits are shrinking dramatically.  Yes, fiscal policy was expansionary in the 1990s and early 2000s, but that corresponded to perhaps the worst 19 year performance in aggregate demand ever seen in a developed economy, with NGDP actually falling between 1993 and 2012.  It’s only since the beginning of 2013 that Japanese NGDP has shown signs of life:

Then I came across this headline on Bitcoin:

Manias, panics and Initial Coin Offerings

Crypto-coin mania illustrates the crazy and not-so-crazy sides of bubbles

In fact, it would be hard to find a more perfect refutation of the bubble hypothesis than Bitcoin. And yet somehow The Economist sees Bitcoin as a good example of a bubble.

Recall that back in 2012 when Bitcoin was trading at $12, the Economist was already calling it a bubble:

These curious capabilities make Bitcoins a combination of a commodity and a fiat currency (creating the coins is referred to as “mining” and they have value only because people accept them). But boosters inflated a Bitcoin bubble. Shortly after the currency launched, articles spread around the internet arguing that Bitcoins would protect wealth from hyperinflation and that early adopters would make a fortune. The dollar price of a Bitcoin currency unit climbed from a few cents in 2010 to a peak of nearly $30 in June 2011 (see chart), according to data compiled by Mt Gox, a popular online Bitcoin exchange. Inevitably, the currency then crashed back down, bottoming out at $2 in November 2011.

Inevitably?  Do the writers at The Economist have no sense of shame?  It’s bad enough that they prevented me from becoming filthy rich by purchasing bitcoin back in 2012, but after being spectacularly wrong about it being a bubble in 2012, they continue to make the same predictions over an over again, year after year.  Bitcoin could fall 99% tomorrow and the Economist would still be completely wrong about it being a bubble.  Please, I beg you, just stop trying to predict asset prices.  I don’t buy the Economist for investment tips.

As each day goes by the four anti-EMH arguments from 2009 (when I started blogging) look weaker and weaker.  NASDAQ 5000?  It just soared past 6700.  (Roughly 5000 in real terms)  Housing prices?  They’re soaring again.  Hedge funds and college endowments outperform?  Not any more.  Bitcoin is a bubble at $30?  Where can I buy some at that price.

But of course none of this will matter.  People don’t believe in fiscal stimulus and bubbles because of the facts, as the evidence strongly refutes these theories.  Rather it seems like soaring prices are a bubble, and it seems like big government spending programs should boost the economy.  Thus people will continue to believe these myths no matter how much evidence piles up against.

PS.  And it’s even worse.  When Bitcoin prices finally plunge (and they will at some point, as all highly volatile asset prices do) then the bubbleheads will think they were right all along, even as they’ve been wrong all along.

It’s hopeless.

That was then, this is now

Consider the following:

Last year they [older evangelicals] flipped from being the voter group most likely to say personal morality mattered in a president, to being the group least likely to say that.

I wonder why?

Or consider this:

Negotiations were still under way on Capitol Hill early this week as Kevin Brady, chair of the House ways and means committee, spearheads work on complex calculations to stay within the limits Congress set for the legislation — an increase in the deficit of no more than $1.5tn over 10 years.

So let me get this straight.  We had a deficit of $666 billion in FY2017 (the work of the devil), and we are in the 9th year of an economic expansion, and consumer confidence is at a 17-year high, and unemployment is 4.2%, and demographics point to rapid growth in the national debt in future decades, and the GOP in its infinite wisdom has decided that now is a good time for another $1.5 trillion expansion in our national debt, on top of the currently unsustainable trajectory?

Remind me about how awful the Obama deficits were?  Freedom Caucus?  Tea Party?  Anyone?

We need tax reform, not tax cuts.

PS.  I enjoyed this—thought you might too:

In a speech, John McCain said the following:

“To fear the world we have organized and led for three-quarters of a century, to abandon the ideals we have advanced around the globe, to refuse the obligations of international leadership and our duty to remain “the last best hope of earth” for the sake of some half-baked, spurious nationalism cooked up by people who would rather find scapegoats than solve problems, is as unpatriotic as an attachment to any other tired dogma of the past that Americans consigned to the ash heap of history.”

That’s a mouthful of a sentence — and an excellent one. But not according to another Arizona Republican, Kelli Ward. John McCormack of The Weekly Standard reported on a campaign event of hers. She said she would Make America Great Again by serving “as a conservative, as a populist, as an Americanist, as a scurrilous nationalist.”

John McCain and Jeff Flake are the old GOP.  It look like scurrilous nationalists such as Kelli Ward are the new face of the Republican Party.  I wonder what Lincoln would think of the fact that it’s now Republicans that view people like Robert E. Lee as patriots.

And let’s not forget Alabama’s embarrassing Roy Moore, who is being endorsed by the so-called “libertarian” leaning GOP senators such as Paul, Cruz and Lee:

“Moore’s attitudes toward homosexual citizens goes far beyond merely not wanting them to have ‘special rights,’ ” wrote Reason’s Brian Doherty, a biographer of the Paul family. “Moore, as he declared from the bench in the that 2002 case, believes all American homosexuals who have a sex life in line with their preferences are for that very reason criminals. The Paul endorsement is a depressing sign of how much personal liberty America’s political class, even the supposedly freedom-oriented ones, are willing to give up in exchange for lip service to tax cuts.”

A GOP that fails to do tax reform, but embraces bigots like Moore is not a pretty sight.  But that’s where we are today.

Just how low can the GOP go?

Just when you think the GOP cannot get any lower, we read this:

The 401(k) simply defers taxes, it doesn’t exempt them. According to the Tax Foundation, a nonpartisan think tank, this half-trillion figure “does not represent taxes that will never be paid. Instead, it represents taxes that will be paid at a future time, when individuals retire.”

“The revenue will have to be found in the future,” Olivia Mitchell, a professor at the Wharton School and executive director of the Pension Research Council, told Yahoo Finance. “It’s robbing Peter to pay Paul.” . . .

 “It’s essentially an accounting gimmick,” said Mitchell .  .  . Marc Goldwein also called it a “budgetary gimmick.”

“Roths are a worse deal for the federal government — probably more revenue is lost,” he told Yahoo Finance. “So if anything, switching from traditional tax-deferred plans to Roth IRAs is probably a long-term loss.”

So the GOP wants to move hundreds of billions in future tax revenue (which will be sorely needed due to the retirement of boomers) up to the present, to provide a fig leaf for their incredibly irresponsible plans to balloon the national debt.  Wonderful.

They claim they’ll replace 401ks with Roths, but:

A shift to Roths from traditional vehicles may present a further fiscal problem in the future. Mitchell believes that taxes will have to rise in the future, potentially erasing Roths’s tax-free withdrawal.

“With population aging and longer lifetimes we’re not going to be able to keep the promise to have Roths not be taxed in retirement,” she said. “I think it’s going to get more difficult to protect.”

Wait, you mean future governments might not honor their promises?  Um, yes:

Politicians from both parties have tried to scale back the 401(k) system. Former President Barack Obama proposed a cap on 401(k) balances of $3.4  million in 2015.

Over at Econlog, I praised Trump for taking a firm stand against any cuts in 401ks.  It took only two days for that to be exposed as another one of Trump’s unending series of lies:

After Trump tweeted that “There will be NO change to your 401(k)” on Oct. 23, Trump then told reporters two days later, “Well, maybe it is [on the table], and maybe we’ll use it as negotiating.”

Speaking of lies, the White House informs us that all 16 of the women who accused Trump of sexual harassment are lying.  Every last one of them. That’s a relief.  For a moment there I was worried that we had a Harvey Weinstein in the White House.

PS.  Suppose the Financial Times said, “Ohio State’s come from behind victory over Penn State shows the need for higher interest rates.”  How would you react? Scratch your head a bit?   Then how do you react to this FT headline:

Billionaire boom is a sign that rates need to rise

Nowhere in the article does the author tell us whether these higher rates are to be generated with an easy money policy (as in the 1960s) or a tight money policy.  What scares me the most is that I suspect they don’t even understand the question.

Can we have at least one media outlet that is not clueless about monetary policy?  (I suppose the National Review is best.)  For the Nth time, interest rates are not a policy; they are the effect of various alternative policies.

HT:  Stephen Kirchner

Abe reasons from a price change

Here’s the FT:

Shinzo Abe has demanded Japanese companies lift pay by three per cent next year as he uses his big victory in last week’s election to intensify his push to boost the country’s economy.

The Japanese prime minister’s decision to give a specific number marks a deepening of government interference in private sector wage settlements. Last year, Mr Abe simply called for pay rises at least as great as the year before.

Would higher wages be good for the Japanese economy?  It depends.  If the higher wages are achieved through more aggregate demand, then they might be associated with higher employment.  If implemented via less aggregate supply (as Abe proposes), they will lower employment.

Consider the following two options:

If the BOJ adopts an expansionary monetary policy, boosting NGDP, then the demand for labor will increase.  This will boost growth, increase wages, and employment will rise to point B.

If the BOJ does not boost NGDP but Abe pressures firms into raises wages anyway, then employment will decline to point C.

It’s very demoralizing that top officials in Japan the US and Europe continue to make the EC101 error of reasoning from a price change.  Over and over again.

Why do we even bother teaching EC101 in colleges?  What’s the point?

PS.  Now that taxes are in the news let me agree with Jeff Flake, who is calling for tax reform, not tax cuts.

Tax reform would be one of the very best things the GOP could do right now.  Tax cuts would be among the very worst moves they could make.

It’s often said that the modern GOP exists for one purpose only, to enact tax cuts.  I don’t think people have fully internalized the implication of that truth.  If and when the GOP does enact tax cuts and/or reform, it will no longer have a reason to exist.  Tax reform might end up being a major achievement, or it might not.  But either way the enactment of a major tax bill will mark the end of the modern GOP.  They will no longer have a reason to exist.

I have no idea what will take it’s place.  Perhaps a white nationalist Bannonite party.  National socialists.  But whatever it is, it won’t be the modern GOP—which will be dead.

PPS.  On the graph, I forget to label points B and C as a 3% wage gain.